Finally: Fannie, Freddie and Delisting

By Matt Phillips

First things first. Fannie and Freddie aren’t real companies. The total equity in the two companies is a negative $146.9 billion, according to Bose George, an equity analyst covering the mortgage and housing sectors for Keefe, Bruyette & Woods. In short, these are government-owned zombie entities that would have been shut down by regulators long ago, if the regulators didn’t own them.

At one time there was a solid base of institutional shareholders for these firms. But that changed a long time ago, when the underpinnings of these entities was fatally disrupted by the subprime crisis. In short, any investors are long gone. “It’s largely day traders, I don’t think it’s people that care about the fundamentals that much,” George said of those who own the shares, in a quick chat with MarketBeat.

And those that have been dealing in these shares have basically been playing a giant game of hot potato, so much so that at points during rally off the March 2009 lows, Fannie and Freddie — valueless companies! worse than valueless! — made up some of the heaviest volume of any stocks.

Now if this was just any junk stock, we wouldn’t really care. But not only are Fannie and Freddie are under effectively part of the government, they’re also likely to remain at the heart of the U.S. mortgage market for the forseeable future. Or at least until the government figures out what to do with them.

For regulators to allow mindless speculation on shares of what is effectively an arm of the government just doesn’t make any sense. It makes a mockery of the message of financial reform the government is trying to send. Here’s the short version of that message: Capital markets aren’t just casinos, they should play a constructive function in society by raising capital, leading to the formation of companies and the development of products and jobs that improve people’s lives.

On a less bombastic note, we would simply concur with George, about the public listing of the shares. It’s dishonest. As such the delisting makes abundant sense. “At least you don’t have the pretense that it’s a real company,” he said.

Of course, it’s important to note that the decision to delist Fannie and Freddie wasn’t exactly a profile in courage. The feds didn’t make this move because it was the right thing to do. Essentially, the shares were delisted because they have been flirting with the — and in Fannie’s case falling below — the $1 price minimum required by the NYSE.

To all the traders out there who have made money on Fannie and Freddie, congratulations. For those who now find themselves stuck with a rapidly cooling, untradeable potato, hope you didn’t lose too much. (Both companies are down roughly 40% Wednesday.)

And for those inveterate traders who just can’t hang it up, have fun over on the pink sheets.

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